James Carrick: Data Exaggerate Impact of China Slowdown

James Carrick is Global Economist at Legal & General Investment Management. This is an edited version of an article that first appeared on the Macromatters blog.

China’s annual economic growth rate was 6.4% in the fourth quarter of 2018, the weakest level since the depths of the 2008-09 recession.

Aside from the dangers of a Sino-US trade war, there is structural downward pressure on Chinese growth from its stagnating labour force. China is likely to grow at a rate of 6% in 2019, significantly lower than the 8.25% recorded each year on average over the last decade and the double-digit average growth rates in the years before the 2008 financial crisis.

Although these figures appear alarming, onlookers should not be overly worried. Since 2005, China’s share of the world economy has more than tripled to 16% from 5%. This larger share means 6% growth today is equivalent to 15% growth a decade ago.

China has contributed around 1% to global growth in recent years, more than the 0.8% contribution it made during the peak of the last economic boom in 2007. The world economy has grown by 2.8% on average over the last 30 years; so China is accounting for around one-third of global growth.

The medium-term outlook for China is mixed. The surge in debt over the past decade signals trouble ahead. But with China running persistent current account surpluses over that period, the debt is held internally rather than externally. The country is more likely to suffer a Japanese-style ‘lost decade’, with zombie firms clogging up its banking sector, than a sharp crash typically seen in externally-indebted emerging economies (like Brazil) when foreign investors refuse to roll over their loans. Another similarity China has with Japan is its progress in technological development and high research and development spending, which the US government considers a threat.

The positive is that China remains underdeveloped. Although its workforce is stagnating, there is scope for productivity to catch up. In absolute terms, China’s GDP per worker is the same today as Japan in 1970, Taiwan in 1986 and South Korea in 1990. Those countries’ labour productivity grew by 5% over the following 10 years.

If China were to grow by 5% per year over the next decade, it would still contribute around 1% to global growth. This would help counter the drag on the world economy from the effects of an aging population.

Although the global and Chinese labour forces are slowing in number, Chinese workers can still become more productive. The new generation is better educated and has greater access to technology than previous ones.

Indeed, a more significant medium-term danger than China’s structural slowdown is the ‘Thucydides trap’, where an incumbent power feels increasingly threatened by an emerging one. Rather than worrying about Chinese economic stagnation, policy-makers ought to focus on the possibility of conflict between Washington and Beijing.